Middle East and North Africa and Pakistan: Muddling through amid Headwinds. IMF Report
ISLAMABAD: Economic activity proved resilient last year despite a large negative terms-of-trade shock, increased food insecurity, tight financing conditions, and debt vulnerabilities in most emerging market and middle-income economies (EM&MIs), and high volatility in energy prices.
However, the MENA economies and Pakistan are expected to go through a soft patch this year, reflecting tight policies in many countries to restore macroeconomic stability, OPEC+-related curbs on oil production, and the fallout from the recent deterioration in financial conditions. Macroeconomic instability and conflict will continue to pose challenges in low-income countries (LICs) and fragile and conflict-affected states (FCS) amid an ongoing cost-of-living crisis that is exacerbating food insecurity. Debt, financing needs, and inflation will remain high in the region’s EM&MIs, reflecting the economic fallout from the pandemic and Russia’s war in Ukraine.
The International Monetary Fund observed this in its latest report titled “Regional Economic Outlook: Middle East and Central Asia, including Pakistan.
Growth Surprised on the Upside amid Strong Domestic Demand Real GDP growth in MENA has been upgraded for 2022 because of stronger-than-expected growth in many oil-exporting economies (Bahrain, Libya, Qatar, Saudi Arabia, the United Arab Emirates) and some oil importers (Jordan, Mauritania, Morocco).
Real GDP in the region is estimated to have expanded by 5.3 percent in 2022 (an upward revision of 0.3 percentage points from October), up from 4.3 percent in 2021, reflecting the strong performance of oil exporters (especially Gulf Cooperation Council [GCC] economies) and Egypt and despite lackluster growth in other EM&MIs and most LICs.
The acceleration in growth in 2022 was mainly due to strong domestic demand—notwithstanding the negative impact of higher prices on households’ purchasing power and firms’ production costs—and a strong rebound in oil production for oil exporters. Several factors explain the relative strength of domestic demand. Tourism rebounded, and hotel occupancy rates recovered, surpassing their pre-pandemic levels in many countries (Jordan, Morocco, Qatar, and Saudi Arabia).
Remittance flows remained strong in mid-2022 in most EM&MIs (Egypt, Jordan, Morocco, and Pakistan). Lending to the private sector (nonfinancial firms and households) continued to expand in real terms in some EM&MIs, with double-digit growth in some countries (approximately 10 percent in Egypt), partly reflecting the prevalence of subsidized lending initiatives in the second half of 2022.
Labor market conditions stopped deteriorating in 2022, although structural factors, such as labor and product market rigidities (October 2021 Regional Economic Outlook: Middle East and Central Asia) hampered a meaningful recovery, especially in EM&MIs. Employment growth in EM&MIs remained lackluster in the second half (Jordan, Morocco, Tunisia) but continued to rise at a healthy pace in GCC countries (Bahrain, Oman, Saudi Arabia), partly reflecting rebounding migrant employment (Bahrain, Oman, Saudi Arabia). Unemployment rates inched up or remained broadly steady in most EM&MIs, staying above pre-pandemic levels in many countries in late 2022 (Jordan, Morocco, Tunisia).
Inflationary Pressures Remain Elevated
Despite Tentative Signs of Plateauing for Oil Exporters Headline inflation showed signs of peaking at the end of 2022, although it remains persistently high for EM&MIs and LICs. Headline and core inflation in many oil-exporting countries (Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia) remain relatively lower than elsewhere—as subsidies and caps on certain products, the strengthening of the US dollar (to which many of the countries peg their currencies), and limited share of food in the consumer price index basket have helped to offset imported inflationary pressures—and appear to have peaked in the last months of 2022. By contrast, headline inflation continued trending upward in most EM&MIs (Egypt, Morocco, Pakistan, and Tunisia, but not Jordan because of its peg to the US dollar and temporary fuel subsidies), partly reflecting the impact of past exchange rate depreciations and persistently elevated food prices, but also broadening price pressures (including on services) as underscored by the rise in core inflation amid loose monetary policy (Egypt, Pakistan, Tunisia).
